New Debt Buyer Law May Decrease Communication, Increase Litigation Between ARM Firms and Consumers

Tomio Narita

A couple weeks ago, California passed the Fair Debt Buying Practices Act, California Civil Code section 1788.50 et. seq., in response to criticism that debt buyers did not have adequate documentation to support the collection lawsuits they were filing against California consumers.  The Act imposes a series of costly new requirements on debt buyers that start before any collection letter is sent to a consumer, and that continue throughout the collection process, including during any collection litigation.

Although the Act was designed to protect consumers and increase the information available to them, a likely result of the Act’s new requirements will be to decrease the level of communication between debt buyers and consumers, while increasing the amount of collection litigation.  Debt buyers are not required to call or write to consumers before filing suit, but they often prefer to, so they can offer settlements and identify legitimate consumer disputes.  Under the new Act, however, if a debt buyer wants to send a letter to a consumer, it must already have possession of, or access to, all the documents and information it will need to obtain a default judgment against the consumer.  Given the costs associated with obtaining the required media, debt buyers may become less flexible in their pre-suit settlement offers with consumers.  In addition, some debt buyers may conclude that it is more cost-effective to avoid the pre-suit notice and validation requirements of the Act and to proceed directly to litigation on a larger number of accounts.